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Incubators Lay An Egg

October 08, 2000

Frontier -- Trends

Incubators Lay an Egg

Why are the business nurturers so fragile themselves?

Flawed business plans, inexperienced leadership, weak financing--these are just some of the common missteps that business incubators are supposed to help their clients avoid. Trouble is, the incubators seem unable to avoid these pitfalls themselves. Of 356 for-profit incubators identified worldwide in a recent Harvard Business School study, "I'd be surprised if 100 survive two years," says Nitin Nohria, a Harvard professor and a co-author of the study.

The prognosis from the National Business Incubation Assn. is no less harsh. "If 50 good incubators came out of this, that would be a great survival rate," says spokeswoman Sally Linder.

That's hardly the image that incubators cultivate. And indeed, Nohria says incubators can be helpful to inexperienced entrepreneurs. But the recent boom, which saw the number of for-profit U.S. incubators leap to 213 from 24 in less than three years, bred a lot of wannabes.

Successful incubation, say Nohria, demands hands-on advisers with deep pockets and expertise, not just impressive Rolodexes. "Everyone can drop 10 names," says Nohria. "You need people who can translate that into a durable business relationship." The reality, says co-author and Harvard B-school professor Morten T. Hansen: Most incubators feature "inexperienced people helping inexperienced people." Even proven entrepreneurs aren't always good coaches, and a new-media guru may have little to offer an up-and-coming router company. As for financial help, don't count on it: Less than one-third have $10 million or more to invest in their clients.

Perhaps this explains why for-profit incubators are stumbling. Just 30% have managed to "graduate" even one company, and only 46% house a company that has won outside financing. Some recent casualties barely managed to stay open themselves a full year.

Which incubators will make it? Look for the ones that cater to narrow niches, says Hansen, pointing to eCompanies' pact with Sprint Corp. to focus on wireless startups. They may also start charging for services to boost their own cash flow as they wait for their clients to go public. David Wright, vice-president at researchers Aberdeen Group Inc., says full-service incubators--those that offer everything from strategy to Web hosting to public relations--are particularly vulnerable since they're saddled with very high overhead.

The lesson? "Get big fast"--the dictate that incubators pushed on startups without regard to cost--wasn't very good advice for either of them.By Kimberly WeisulReturn to top

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ONLINE EXTRA

Finding an Incubator That Won't Lay an Egg

Smart questions to ask the managers before your company settles in

While most for-profit incubators are likely to fail within the next two years, that doesn't mean you should give up on them entirely. A well-run incubator can still be a big help for a novice entrepreneur.

"Incubators are taking people who really have no clue how to start a business and giving them a chance," says Nitin Nohria, a Harvard Business School professor who recently completed a study of these for-profit concerns. That puts the burden of finding the right incubator -- out of over 300 tracked by Harvard -- squarely on the entrepreneur. You can start by asking the right questions:

*Does the incubator have access to capital? Nohria and his colleagues found that only a third of incubators had even $10 million to invest in their clients. Look for incubators that can stick with their companies for the long haul, investing in repeated funding rounds.

*Can the incubator bring companies together? Ask to speak to clients who have formed marketing relationships, sales agreements, or other partnerships thanks to the incubator's connections. "If these incubators don't have that track record by now, I wouldn't do business with them," says Nohria.

*Does the incubator staff have time for you? Some outfits make sure their senior staff has weekly meetings with their clients, while others just promise to grab lunch occasionally.

*Does the incubator have technical expertise on hand? If you're launching a tech company, make sure the incubator staff has technical knowledge that's directly applicable to your field. If you're working on wireless protocols, for example, an incubator may not have much to offer if its partners are e-commerce concerns.

*How much is incubation really going to cost? Some incubators make investments in their companies, but then charge for services like Web hosting and recruitment. "When incubators say they charge at cost, what they really mean is they charge a lot," says Harvard professor Morten T. Hansen. David Wright, an Aberdeen Group researcher, even suggests that entrepreneurs sign service-level agreements, just like you'd sign with any other vendor. That will make it absolutely clear which services the incubator will provide, and how much you'll be charged.By Kimberly Weisul in New York Return to top